STOCK WATCH

ABG Shipyard (80.00) is one of India’s largest private sector shipbuilding companies & established manufacturer and service provider of a variety of ships, including bulk carriers, interceptor boats, diving support vessels, anchor handling supply ships, dynamic positioning vessels, anchor handling tugs & other multipurpose vehicles. Till date it has delivered 104 ships and has further order book position of nearly Rs 10,000 cr to be executed in next 4~5 years. Few months back it bagged its first rig order from Essar Shipping. For the Dec’08 quarter, company has reported 80% rise in sales to Rs 489 cr but due to very high interest cost, PAT remained flat at Rs 46 cr. Although there is high probability of company witnessing huge order cancellation in short term because of slowing down of world economy, still the Indian ship building industry has a tremendous growth potential ahead. According to new international shipping norms, single-hull tankers have to be phased out by 2010 & ships that are over 25-year old have to be scrapped. Meanwhile, the ship-building activity has shifted from Europe to Asian countries like Korea, China and India due to cost and other factors. Notably, it is the first ship building company in private sector to actually receive the subsidy to the tune of Rs 19 cr from govt last year. It is estimated to clock a turnover of Rs 1400 cr and profit of Rs 150 cr i.e. EPS of Rs 29 on current equity of Rs 51 cr. Incidentally company hasn’t pledged any share as of now.

Investors shouldn’t sell Sunil Hitech (68.00) although it posted loss at the net level. Actually it recorded 90% growth in revenue to Rs 148 cr and 40% increase in profit to Rs 7 cr, but due to provisioning of notional loss in mutual fund investments to the tune of Rs 13 cr, it registered net loss of Rs 6 cr. Although company hasn’t bagged any major order of late, but it boast of having an massive order book position of Rs 1300 cr. Company specializes in niche segment of fabrication, erection & testing and commissioning of thermal power plants including doing individual works under balance of plant. It also undertakes projects in the transmission and distribution segments including commissioning of EHV lines for substations, errection of turbine generators etc. It has 125,000 TPA of steel fabrication capacity and 100,000 TPA of equipment installation capacity in power plants. Incidentally, company has an under leveraged balance sheet with a low debt equity ratio of 0.60x times and can raise more debt comfortably. It may end FY09 with a topline of Rs 525 cr and PAT of Rs 25 (excluding notional loss on investment). This translates into EPS of Rs 20 on current equity of Rs 12.30 cr. Secondly it has huge reserves to the tune of Rs 145 cr on small equity leading to a healthy book value of Rs 128. Aggressive traders can buy for short term gain.

For the Dec’08 quarter Madhucon Project (50.00) announced satisfactory result. Revenue grew by 15% to Rs 227 cr and NP increased marginally to Rs 14 cr. Accordingly for the first three quarters it recorded 40% growth in topline to Rs 710 cr and 20% rise in PAT to Rs 41.50 cr thereby posting an EPS of more than Rs 11 till date. Company is engaged in execution of infrastructure projects, such as construction of national highways, fly-overs, dams, tunnels, aquaducts, bridges, coal handling plants, railways projects, power projects, workshops, and residential cum commercial ventures. Company boast of having an order book of more than Rs 5000 cr. Few months ago it bagged a single EPC order of nearly Rs 1000 cr for setting up two thermal plant of 135 MW each in Andhra Pradesh. Besides it has entered into MOU with Jharkhand govt for setting up 1000 MW thermal power plant at total cost of Rs 4800 cr. It has also been awarded 2 hydel power project of 315 MW in Arunachal Pradesh. Moreover, company has a strong portfolio of BOT projects with four NHAI toll based road projects of 330 km. It has also diversified by operating one coal mine of 3200 hector in Indonesia and second coal mine of 19000 hector is in exploration stage. For FY09 company may report total revenue of Rs 950 cr and profit of Rs 45 cr leading to an EPS of Rs 12 on current equity of Rs 7.40 cr with face value as Rs 2/- per share. Although funding its massive projects will be a challenge for the company, still it seems a good bet at EV of less than Rs 400 cr.

Aban offshore (440.00) declared satisfactory result for the Dec’08 quarter. Its consolidated sales shot up 40% to Rs 837 cr whereas net profit quadrupled to Rs 256 cr on the back of higher other income (forex gain) of Rs Rs 162 cr. Notably it recorded an OPM of 56% and posted an EPS of Rs 68 for the single quarter. Effectively for the nine months ending Dec’08 it has recorded 75% rise in turnover to Rs 2410 cr and 800% jump in PAT to Rs 648 cr i.e. EPS of Rs 170 till date. Incidentally this includes other income to the tune of Rs 340 cr. Company is engaged in providing oil field services for offshore exploration and production of hydrocarbons in India and abroad. With 21 offshore assets it is among the top ten offshore drilling asset owners in the world. It possesses fifteen jack-up offshore drilling rigs, three drill ships, one floating production platform and a jack-up rig & drill ship each on bareboat charter. It is among the few global companies to facilitate oil exploration at water depths ranging from 250 ft to 7000 ft and drilling depths ranging between 20,000 ft and 30,000 ft. Having its footprint globally across 10 nation, company boast of serving leading global and domestic E&P companies such as ONGC, Shell Brunei, Shell Malaysia, Cairn Energy, Petronas Carigali, Exxon Mobil, Chevron, Hardy Exploration, Oriental Oil Dubai, ROC Oil China, and GSPC to name a few. Although company may witness a sharp fall in charter rate due to slowdown in E&P activities and lower demand, still may to do well with improved capacity utilization on the back of deployment of all its vessels. Despite being an over leveraged company, its worth a punt at current levels

HBL Power System Ltd - Rs 110.00

Founded in 1977, HBL Power Systems Ltd (HBL) is an acknowledged leader in design, development and manufacture of industrial & specialized batteries, allied electronic products and DC (direct current) systems in India. DC power systems are used across the world for a variety of application where the traditional power supply system cannot be sustained/supported. It is specifically required in mobile (non-stationary) applications like rail coaches, aviation etc. Therefore company focuses mainly on five key sectors namely telecom, aviation, railways, defense and other industrial segment including oil & gas, power, petroleum, steel etc. In these applications the usage of conventional sources of power / electricity is not possible and DC power supplied thru batteries is to be relied upon. Notably, HBL offers a diverse portfolio of product which has been classified into following three segments

A. Batteries: This is the core business of company deriving more than 90% of total revenue. HBL is a technology focused manufacturer of several ranges of specialized application batteries i.e. nickel cadmium (pocket, fibre, and sintered plate), lead acid (VRLA, Tubular, LMLA), silver oxide zinc, lithium, thermal, etc. Infact it is the market leader in VRLA (valve regulated lead acid) and NCPP (nickel cadium pocket plate) batteries and enjoys 50% market share of domestic telecom market. Ironically, HBL is the world’s second largest player in nickel cadium alkaline batteries and stands 3rd for Nicad Passenger aircraft batteries. Moreover it is among the very few companies in the world making ultra high specialties batteries for military use like thermal, reserve and torpedo batteries. It also produces passenger and military aircraft batteries which are mainly for export.

Meanwhile, company has completed the development and test marketing of pure lead tin (PLT) Batteries for diesel engine starting (gensets, trucks etc) and has even entered into agreements with a reputed company for sale under their label. This marks the entry of HBL into the gigantic automotive industry. It is also working with makers of EKO battery operated electrical vehicles to design & manufacture advanced technology batteries for these future products. To encourage use of green, non-polluting power fast growth is expected in the solar power and as each equipment based on solar power needs batteries to store and supply the power, the potential in this area is very substantial

B. Railway Electronics: Traditionally HBL has been supplying various batteries for train lighting, air conditioned coaches, locomotives, signaling and communications. But off late, company has designed and developed wide range of microprocessor based signaling products and power systems to cater to the needs of Indian Railways. It now offers integrated power supplies for railway stations and does turnkey signaling works contracts including design, installation and commissioning. It even has a dedicated division to execute end-to-end turnkey railway signaling works, starting from yard design, estimation, procurement, installation and commissioning. Company is now also working closely with IRISET, RDSO and other agencies to showcase and implement its other innovative electronics products like data loggers, automatic train charting systems, high frequency track circuits, solid state interlocks, digital axle counters, etc. In short this segment is expected to be the major growth driver in coming years, since the railways have embarked upon the modernization programmes of signaling systems all over the country in a phased manner.

C. Defence Electronics: Although HBL derives hardly 5% revenue from this division but it boasts of supplying several specialized, tailor made batteries to the Army, Navy and the Air Force. Last year it supplied battle tank batteries to three NATO countries. Infact it is most dependable supplier to defence for critical application areas like torpedoes, missiles, aircraft starting, ground power units etc. where no other manufacturers can cater. Besides, company also deals in several electronic products which are used in defense sector like electronic warfare, radar, field telephone exchanges, electronic proximity, time fuzes, radio relays, laser weapon sights, night vision devices, opto electronics, thermal imagers, simulators, mine and grenade electronics etc. Unlike batteries and railway products where almost all development was done in house, HBL has collaborated with IAI - ELTA of Israel for most of the defence electronics products. Their joint venture has already bid for two defense contracts for electronics worth Rs 500 cr. The tender is expected to be opened and finalized during the current fiscal.

Apart from above, HBL also manufactures other power electronics such as thyristor controlled battery chargers, earth leakage monitors, battery monitoring systems, industrial chargers, uninterrupted power systems, distribution boards etc. To meet the rising demand, HBL has been constantly expanding and modernizing its production facilities at Hyderabad, Manesar (Delhi) and Haridwar. Recently it has put up two new factories at Vizianagaram and SEZ Vizag in Visakhapatnam under a capex of Rs 150 cr. Now it is setting up a small facility in Mahape, New Mumbai. Last fiscal it commenced production at the modern printed circuit board assembly and test facility which has been specially designed for small volumes of high quality. For the next two years it has a capex plan of Rs 240 cr to augment the capacity of its VRLA & NCPP batteries by further 15~20%. Maintaining its philosophy of 'We do not forget the batteries we have sold', HBL has doubled the after sales service centre to 80 and is further expected to take it to 120 in the current year. Incredibly, HBL has developed strengths in areas of limited competition and focused on direct marketing to chosen customers / market segments.

Fundamentally as well as financially, HBL is on a strong footing and doing extremely well. For the nine months ending Dec 2008 it has recorded 40% growth in sales to Rs 958 cr whereas PAT zoomed up 65% to Rs 73 cr thereby surpassing the entire FY08 net profit of Rs 67 cr by decent margin. This is despite the fact that company’s margin has taken a hit due to sharp rise in raw material cost in the last two quarters. However, prices of lead, nickel, copper, tin and other metals has fallen considerably which may improve the operating margin of company in coming quarters. Still on a conservative basis, it may end FY09 with sales of Rs 1250 cr and PAT of Rs 80 cr i.e. EPS of Rs 33 on equity of Rs 24.30 cr. Incidentally company has a debt of Rs 350 cr leading to a debt equity ratio of 1.2x times. In order to fund its expansion, company had planned a preferential allotment as well as a right issue, but due the stock market sentiment, had to shelve it off. Importantly, with telecom, power, railway & defense being its focus market, HBL isn’t much affected by the ongoing recession. And in case if it witnesses any slowdown in domestic demand it can always cater to international market and increase its export revenue which is currently around 10% of total sales. Considering all the factors investors are strongly recommended to buy at current levels with a price target of Rs 240 in 12~15 months.

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Patels Airtemp (India) Ltd
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HBL Power Systems Ltd
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Small & Beautiful

Genus power (90.00) declared average result for the Dec’08 quarter. Sales improved by 15% to Rs 120 cr and PAT grew marginally by 7% to Rs 10.65 cr. Company is amongst the leading integrated metering solutions' providers and the pioneer in implementing AMR (Automatic Meter Reader) technology. Importantly it has diversified into engineering construction and currently derives more than 50% from EPC power T&D projects where it provides absolute solutions for power transmission & distribution system. As a step forward, company has also launched IT enabled distribution transformer metering system, feeder monitoring and management system, smart street light management system with value added software application for providing end to end solutions for energy management. Although company’s participation in tenders have come down drastically and it may bag fewer orders in future still as of now it has an order book of Rs 795 cr. Besides it has bid for tenders of more than Rs 1500 cr, out of which it is L1 bidder in tenders worth Rs 300 cr. So it can clock a turnover of Rs 475 cr and profit of Rs 35 cr for FY09 on conservative basis. This translates into EPS of Rs 24 on current equity of Rs 14.80 cr. Keep accumulating at declines

For the latest Dec’08 Roto Pumps (30.00) came out with satisfactory result as sales increased by 35% to Rs 14 cr although net profit declined marginally to Rs 0.70 cr due to higher interest cost. Accordingly sales for the first three quarters improved by 35% to Rs 39 cr and NP increased by 10% to Rs 2.25 cr. Company is a reputed manufacturer of progressive cavity pumps and twin screw pumps which have very wide application in agriculture, domestic and industrial sector. Besides India, it has warehouse cum marketing office in Australia and U.K. and also good network of distributors spread across the globe. Remarkably, company derives nearly 55% revenue from exports. However during Sept’08, it bagged approx Rs 4 cr order from L&T which is the single largest value order in the history of the company. To maintain its growth momentum, company is implementing an expansion cum modernization program for which it has been recently allotted an industrial land of 20,000 sq mtr by Greater Noida Industrial Development Authority in Sector ECOTECH – XII. For FY09 it may register a topline of Rs 50 cr and bottom-line of Rs 2.75 cr which translates into EPS of Rs 9 on a small equity of 3.09 cr. It is quite probable that company may maintain its 20% dividend for FY09 which leads to a yield of whopping 7%. Besides with 70% promoter holding and book value of Rs 45, scrip is trading fairly cheap at current EV of Rs 15 cr.

Diamond Power Infrastructure Ltd (90.00) registered 10% rise in sales to Rs 140 cr and 20% jump in NP to Rs 16 cr for the Dec’08 qtr. However the nine months figures are much encouraging as sales are up by 60% to Rs 493 cr and profit before tax has shot up by 70% to Rs 56 cr. However company hasn’t made any tax provision and will do at the end of the year. It is a leading manufacturer of transmission & distribution conductors, power & control cables & speciality cables. After the acquisition of Western Transformers in March’07 and Apex Electricals in July’07, company has also ventured into transformer production with installed capacity of 7500 MVA for power transformer and 5000 MVA for distribution transformer. To cater the rising demand and increase it export revenue, company is setting up power equipment park spread across 110 acre in Vadodara which would have manufacturing facilities for 50,500 Mt of conductors, 48000 Mt transmission tower plant, 25,000 kms of LT cables, 3200 kms of HT cables and 3000 kms cables of EHV cables. The park expected to go on stream by Dec 2009, will also have space for setting up 50 ancillary units for power equipment manufacturers. Company has already achieved the financial closure for this 260 cr capex plan. Partners. Meanwhile for FY09 it may clock a turnover of Rs 675 cr and profit after tax of Rs 60 cr i.e. EPS of Rs 29 on current equity of Rs 21 cr. Incidentally, company has recently repaid the short term loan to the tune of Rs 40 cr to Clearwater Capital.

Despite the ongoing gloom & recession one company which posted stunning result is VST Tillers (135.00). Suddenly its operating margin has shot up in the last two quarters coupled with consistent increase in sales on QOQ basis. Even for the Dec’08 quarter its sales increased by 55% to Rs 70 cr whereas PAT shot up 140% to Rs 8 cr thereby posting an EPS of whopping Rs 14 for the single quarter. Cumulatively, for the first three quarters it doubled its net profit to Rs 18 cr on 50% higher sales of Rs 193 cr. However company is paying the highest income tax rate of nearly 35% which ensures the genuineness of profit. Company is a leader player in power tillers and also caters to the sub 20HP tractor segment with a niche market share in Maharashtra and Gujarat. To beat the competition, company itself imports and market Chinese make power tillers under the brand name “Dragon”. It is also selling Rice transplanters in the rice growing belts of India, which is slowly shifting in favor of these machines to overcome manpower shortage and reduce costs. Although the power tiller industry is growing at around 20% per annum, still much of the growth relies on govt subsidies and agricultural lending by banks. However the increase in central subsidy on power tillers augurs well for the company as govt has given special thrust in the 11th five year plan thru various schemes like Rashtriya Krishi Vikas Yojana, Integrated Tribal Development, National Food Security Scheme, Macro Management Scheme etc. It may end FY09 with sales of Rs 250 cr and profit of Rs 24 cr resulting into EPS of Rs 42 on equity of Rs 5.80 cr. Buy at sharp declines only.

Accurate Transformers Ltd - Rs 28.00

Established in 1987, Accurate Transformers Ltd (ATL) is the flagship company of the Delhi based Accurate group which has diversified interest in transformers, overhead line conductors, energy meters, insulating oils & chemicals. Notably, ATL pioneered the manufacture of transformers at a time when most electrical equipments were imported. Presently it manufactures power as well as distribution transformers ranging from 1 MVA to 40 MVA - in up to 220 KV class. Power transformers are used to transform power voltage from the generation point to the transmission point whereas distribution transformers are used to transform power voltage from transmission point to distribution of power to the end user. Presently, company supplies these transformers to state electricity boards across the country including those of Uttar Pradesh, Rajasthan, Punjab, Maharashtra and West Bengal on a made-to-order basis. But now, to de-risk its revenue model, ATL has initially supplied a small quantity of transformers to private sector last year and is making serious efforts to decrease its dependence on govt orders. As its transformers are in operation for years, the quality and reliability of company’s products is well established. Incidentally company also offers total technical support and customer service throughout the life of the transformers – may it be spare parts or repairing of transformer in case of breakdown.
Being a two decade old company, ATL has set up manufacturing facilities spread across Ghaziabad, Sikandrabad, Greater Noida, Dehradun & Haridwar with an total installed capacity of more than 8000 MVA, which is relatively quite huge. Out of these, Dehradun (600MVA) & Haridawar (2400 MVA) plants are relatively new and enjoy income tax and excise exemptions. However due to high receivable cycle and shortage of working capital, ATL is unable to utilize its capacity and is working at less than 60% capacity utilization. For FY08 it manufactured 12420 nos of transformers against 9999 transformer in FY07. But importantly company is shifting its production focus on higher rating transformers which are less competitive and offers lucrative margin in comparison to lower capacity transformers. In the same direction, company has most probably already developed a prototype sample of 160 MVA power transformer and is looking forward to enhance its capability to manufacture the same at its plant. For this company may implement a small capex of Rs 10 cr in near future to acquire the machinery and technology. Post this up gradation, ATL will be among the handful of companies having competence to make such high capacity transformer. On the other hand, company has even ventured into fast growing rural electrification project which involves the complete setting up of electricity in remote areas including the laying of lines, poles and substations. It has already implemented two such projects one at Etah district of Uttar Pradesh and another at Nainital District of Uttaranchal. Company is trying its best to obtain more such orders and considering the strong govt contacts of the management it may get couple of more projects in future.

Notably, the future prospect of transformer industry looks very robust for atleast next 2~3 years considering the massive investment lined by central govt to achieve the status of power for all by 2012. Under the 11th five year plan, govt intends to add 78500 MW of power generation capacity apart from allotting 28000 MW thru UMPP projects. Historically, with every 1 MW of power generating capacity being added, nearly 7 MVA of transformer is required to compliment it. Besides considerable replacement demand is also generated every year due to aging of old transformers. Moreover, the manufacturers are also required to fulfill the export demand from neighboring countries etc. In short, average demand of transformers for more than 150,000 MVA is estimated annually for next five years. Thus ATL with vast surplus capacity has tremendous scope to grow in future.

Financially, when most of its peers are almost debt free ATL has a huge debt of Rs 40 cr against gross block of Rs 10 cr and company is still looking for sources to further fund its working capital requirement. As it didn’t get the approval from SEBI, company has to cancel its earlier plan of preferential allotment of 31 lakh warrants to promoters. Ironically for FY08, instead of cash generation company reported cash outflow of whopping Rs 20 cr from operating activities. At the same time, company reported unaudited sales of Rs 197 cr for entire FY08 which got reduced to Rs 180 after being audited. Its average receivable period is as long as 5 months with total debtors of Rs 75 cr i.e. equivalent to 40% of net sales. Although company derives considerable sales revenue from trading activity, still it doesn’t disclose it segment-wise. Moreover in 2006, an investigation was carried out by income tax authority against the company and matter is still pending. Despite all such concerns including promoters integrity, aggressive investors can buy this scrip at current market cap of hardly Rs 8 cr. Infact, effectively they are getting this company for free as it holds actual cash of Rs 8 cr as on 31st March 2008. Other positive development is that company has reported better OPM of 15% in the current year against 9% last fiscal. It has already clocked an EPS of Rs 12 till date and with last quarter being the biggest traditionally; it may end up with more than Rs 15 for entire FY09. The sharp fall in copper prices and other input cost augurs well for company, but due to intense competition it has to pass it on to its customers. Share price can easily appreciate 50% within a year.

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